- Correct COBRA, HIPAA and Other Group Health Plan Violations Quickly: Here's Why
- April 7, 2010
- Law Firm: Miller Johnson - Grand Rapids Office
The Internal Revenue Code imposes an excise tax on employers who fail to comply with various federal mandates for group health plans like COBRA and HIPAA. But the IRS has historically not imposed the tax for violations discovered during an audit, and there has been no requirement that employers self-report the tax. As a result, the excise tax has been a minimal concern for employers who failed to comply with these mandates.
Now that has changed. The IRS issued final regulations for self-reporting (and paying) the excise tax for such violations and a new form (Form 8929) to use to self-report, starting this year.
Violations Subject To The Excise Tax
The excise tax is imposed on employers that violate the following federal laws and regulations issued under them:
- HIPAA’s portability and nondiscrimination rules
- Genetic Information Nondiscrimination Act (GINA)
- Mental Health Parity Act
- Newborns’ and Mothers’ Health Protection Act (requires a minimum hospital stay for newborns and mothers)
- Michelle’s Law (requires continued coverage for a dependent child who would otherwise lose eligibility for coverage as a full-time student due to a medical condition)
- Health savings account (HSA) comparability rules (requires that employers making contributions to health savings accounts not discriminate when doing so)
Amount Of The Excise Tax
The excise tax for violations of mandates other than the HSA comparability rules is $100 per day for each day of the noncompliance period, which begins on the date the failure to comply with the mandate first occurs. This could be the date a notice is not timely provided or the date coverage is first denied, for example. The noncompliance period ends when the failure is corrected. The failure is treated as corrected if:
- It is retroactively undone, to the extent possible.
- Affected participant is placed in a financial position that is as good as the position he or she would have been in if the failure hadn’t occurred.
Different rules apply for a failure to comply with the HSA comparability rules. Then, the excise tax is 35 percent of the amount the employer contributed to the HSAs of all employees during the calendar year.
Potential Relief From The Excise Tax
There are some exceptions to the excise tax for violations of mandates other than the HSA comparability rules. First, if the employer doesn’t know about the failure and wouldn’t have known about the failure if reasonable diligence had been exercised, the noncompliance period does not start until the first day the employer knew or should have known about the failure. Then, if the failure is corrected within 30 days after the employer knew, or should have known about the failure, the excise tax does not apply. This gives you a strong incentive to correct compliance failures as quickly as possible after you discover them.
Again, the rules are different for a failure to comply with the HSA comparability rules. There is no exception to the tax if the violation is corrected within 30 days of its discovery, the IRS can waive the tax if the failure to comply was due to reasonable cause and not willful neglect. It can also waive all or part of the tax if it deems that the amount otherwise due would be excessive relative to the failure involved.
Reporting Violations And Paying The Excise Tax
You must now report violations by filing IRS Form 8928. Form 8928 and the excise tax for violations other than a failure to comply with the HSA comparability rules are due on or before the date the employer’s income tax return for the year in which the failure occurred is due, without extensions. Form 8929 and the excise tax for a failure to comply with the HSA comparability rules are due by April 15 of the year following the calendar year in which the failure occurred.
If Form 8928 and the excise tax are not filed and paid on time, the IRS will impose penalties. The penalty for filing a late return is 5 percent of the unpaid tax for each month or part of a month the return is late, up to 25 percent of the unpaid tax. The penalty for late payment of the excise tax is 0.5 percent of the unpaid tax for each month or part of the month the tax is late, up to 25 percent. Interest is charged on the penalties and unpaid tax.
Effective Date Of New Reportiing Requirement
The requirement to self-report and pay the excise tax for violations of the HSA comparability rules applies for violations that occur in the 2010 calendar year. The requirement to self-report and pay the excise for other violations applies for any Form 8929 or excise tax due on or after Jan. 1, 2010. This appears to require that the excise tax be paid for violations that occurred before the effective date of the regulation and were not timely corrected.